To address the ongoing retirement savings gap, all but three states have initiated or passed legislation to set up a state-sponsored retirement savings plan (SSRP), and while early implementation efforts so far have been successful, a new report suggests there’s room for improvement.
Indeed, expanding retirement plan access to employees of small businesses has posed a challenge for decades, Cerulli explains in its latest Cerulli Edge—U.S. Retirement Edition, 4Q 2022 Issue.
The absence of not only employer-paid retirement benefits, but also the ability to contribute to a tax-advantaged retirement plan beyond retail options, can be a significant financial disadvantage for workers who will need to rely on their own savings to fund their retirement, the report observes.
As of 2021, just half of workers for firms with less than 50 employees had access to an employer-sponsored retirement plan. In response and in the absence of concrete federal efforts, state governments, seeking to avoid stress on public finances, have begun to take action by initiating new legislation establishing SSRPs that draw upon auto-enrollment policies and employer mandates. To that end, nearly all states — except for South Dakota, Alabama and Florida — have initiated legislation to set up some form of a SSRP of their own as of 2022.
According to the report, among the most effective structures implemented so far are auto-IRA programs, allowing for a combination of mandated employer participation, automatic participant enrollment and payroll deductions.
“The three state SSRPs that already have garnered meaningful participation and net flows, CalSavers (California), OregonSaves, and Illinois Secure Choice, have done so through state auto-IRA programs,” notes David Kennedy, senior analyst at Cerulli.
Now that these plans are a reality, the question, according to the report, is whether plan providers are delivering the benefits that were promised and what future enhancements could be implemented.
Financial Wellness Resources
Cerulli suggests that once these programs achieve their participation goals and program set-up costs have been recouped, other enhancements — such as quality financial wellness and education resources — could help to address challenges to saving beyond plan access.
“Most retirement plan participants today have access to a variety of tools and services that can help them address other important impediments to saving, such as budget planning services, or that can help manage complex financial tasks including portfolio construction and tax management,” explains Kennedy. “This means workers who lack access to a workplace plan are missing out on opportunities to grow their financial competencies — not just their account balances.”
In a 2021 Cerulli Survey, two-thirds (66%) of plan sponsors said they offered a financial wellness program. Not surprisingly, the results correlated with plan size — while 82% of large plan ($250 million or more in plan assets) sponsors offered such a program, just 48% of small plans (less than $25 million in plan assets) did so. When asked why not, 20% of small plan sponsors said cost was a deterrent.
Still, these types of programs are not just nice-to-have amenities, the report emphasizes. In Cerulli’s 2022 401(k) Plan Participant Survey, respondents who did not start saving for retirement until later in their lives shared that the most common reasons for doing so were that they did not have enough money (43%), were prevented from saving due to life events (26%) or had competing financial priorities such as student loans (17%).
Providers of state retirement plans, as well as state officials, should pay attention to the importance of dedicated financial education tools and resources and their effect on savings rate and overall employee financial well-being, the report suggests.
Currently, the CalSavers, Oregon Saves, and Illinois Secure Choice websites offer sections dedicated to financial education tools and resources, but they simply direct users to public, government-sponsored websites such as those for the Consumer Financial Protection Bureau or Social Security Administration, Cerulli notes. And while the information available on these sites is of good quality, it still requires significant participant engagement to gain access and benefits.
Meanwhile, more advanced versions of financial wellness programs now incorporate journey-based designs, interactive multi-media modules, and targeted messaging pushed to participants via email or text.
Cerulli emphasizes, however, that even if proven effective, adoption of enhanced services like these among SSRPs will take time. Private corporate DC plan providers have invested substantial time, effort and money into proprietary or third-party financial wellness platforms to help address these concerns. SSRPs still are in the process of proving their economic viability and recovering initial program set-up costs.
“As these programs continue to mature, however, they should look for ways in which they can leverage their scale to bring the per-participant cost of these programs down to levels still in line with one of the original intentions of these SSRPs — to lower participant fees in small retirement plans — and that also could further address impediments to saving and financial wellness,” the report states.
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